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Exam 6: Corporations: Redemptions and Liquidations

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Question 41

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Describe the requirements for and tax consequences of a § 338 election.

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In order to make an election under § 338...

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Question 42

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Shareholders may defer gain,to the point of collection,on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets.

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Question 43

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Which of the following statements is correct with respect to the § 338 election?

Domingo and Juan,brothers,each own 300 shares in White Corporation (E & P of $700,000) .Heron Partnership owns the remaining 400 shares of stock in White Corporation,and Juan has a 25% interest in Heron Partnership.White Corporation redeems 200 shares of Juan's stock for $120,000.Juan paid $150 a share for the stock five years ago.With respect to the redemption:

As a general rule,a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.

What are the tax consequences of a qualifying stock redemption to the distributing corporation?

Purple Corporation has two equal shareholders,Joshua and Ellie,who are father and daughter.One year ago,the two shareholders transferred properties to Purple in a § 351 exchange.Joshua transferred undeveloped land (basis of $230,000,fair market value of $160,000) and securities (basis of $10,000,fair market value of $90,000) ,while Ellie transferred equipment (basis of $175,000,fair market value of $250,000) .In the current year,Purple Corporation adopts a plan of liquidation,sells all of its assets,and distributes the proceeds pro rata to Joshua and Ellie.The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $120,000 and was sold for this amount.Purple never used the land for any business purpose during the time it was owned by the corporation.What amount of loss can Purple Corporation recognize on the sale of the undeveloped land?

For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes),it need not satisfy any of the § 302 redemption provisions.

Carol,Bonnie,and Ann,sisters,own 300 shares,300 shares,and 400 shares,respectively,in Teal Corporation (E & P of $600,000) .Teal Corporation redeems all of Ann's stock for $250,000.Ann paid $100 a share for the stock five years ago.Ann continued to serve as president of Teal after the redemption.With respect to the redemption:

Mary and Jane,unrelated taxpayers,own Gray Corporation's stock equally.One year before the complete liquidation of Gray,Mary transfers land (basis of $300,000,fair market value of $280,000)to Gray Corporation as a contribution to capital.Assume that Mary also contributed other property in the same transaction having a basis of $10,000 and fair market value of $50,000.In liquidation,Gray distributes the land to Jane.At the time of the liquidation,the land is worth $200,000.

Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?

In 2007,Floyd carried out a successful complete termination redemption of his stock in Gray Corporation.Floyd was able to qualify the transaction as a complete termination redemption only by use of the family attribution waiver.In 2010,Floyd receives stock in Gray Corporation as a gift from his father.Floyd has acquired a prohibited interest within the 10-year postredemption period and,as a result,the 2007 redemption no longer qualifies as a complete termination redemption.

Discuss the tax consequences associated with a sale of § 306 stock.Can the § 306 rules have a harsher tax result than if the corporation had distributed a taxable dividend in the first place?

A partial liquidation cannot result in sale or exchange treatment to a shareholder if it results in a pro rata stock redemption.

Hummingbird Corporation has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Juan,300 shares,Erika,300 shares,and Dalissa,400 shares.Each of the three shareholders paid $75 per share for the Hummingbird stock 10 years ago.Hummingbird has $800,000 of accumulated E & P and $40,000 of current E & P.In January of the current year,Hummingbird distributes land held as an investment (adjusted basis of $260,000,fair market value of $220,000)to Dalissa in redemption of all 400 of her shares.In December of the current year,Hummingbird distributes securities held as an investment (adjusted basis of $90,000,fair market value of $110,000)to Erika in redemption of 200 of her shares.

In the current year,Loon Corporation made a distribution in redemption of some of its shares.Loon incurred expenditures in connection with the redemption totaling $30,000 (accounting fees of $10,000,legal fees of $15,000,and brokerage fees of $5,000) .The distribution was a qualifying stock redemption.How much of the $30,000 is deductible in the current year?

If a liquidation qualifies under § 332,any minority shareholder will recognize gain (but not loss)equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $1.2 million.In the current year,Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $800,000 (fair market value of $1.3 million).Brown Corporation will have a basis in the assets of $1.2 million,the same as Brown's basis in the Green stock.